3/13/13: Three New Buys Complete Overhaul

By Igor Greenwald • March 13, 2013

We’ve added Cabot Oil and Gas (NYSE: COG), Whiting Petroleum (NYSE: WLL) and American Railcar Industries (NasdaqGS: ARII) as new buys in this week’s issue. COG is a Growth Portfolio buy below $72, WLL is a Conservative Portfolio buy below $57 and ARII is an Aggressive Portfolio buy below $52. As part of the portfolio overhaul, we’ve revisited the Best Buy recommendations for each portfolio. For the Growth Portfolio, the current Best Buys are COG, GEOS, OXY, SLB and EOG. We’re raising the maximum buy point on EOG to $145. For the Conservative Portfolio, the Best Buys are HP, E, TOT and WLL. For the Aggressive Portfolio, the Best Buys are CLR, ARII, JOY, NBR, SDRL and SLCA.

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Byron Redburn

Byron Redburn

Have the fundamentals for SLCA stock changed? Is there anything interesting behind the sale of SLCA stock by one of the “owners”?

Igor Greenwald

Igor Greenwald

Nothing has changed except for the size of the public float, which will nearly double after the secondary. The business fundamentals and the valuation remain bullish, and while I can’t say what motivated the sale I view it as opportunistic profit harvesting after the strong report, nothing more.

Stephen Reiser

Stephen Reiser

Hello Igor and Rob, I wanted to ask about your views on COG, GEOS, and CBI generally (the newly added growth picks). All of these stocks look expensive and potentially “momentum” plays — that are being recommended in the later stages of a bull market. While these companies all look good vis-a-vis recent fundamentals and performance — there is very serious risk if the global economy rolls over (e.g., the momentum crowd will bail and we will all be “stuck” with a very serious pullback — worse than say a deep value play like UPL where you know there is a low price and several decades of oil reserves to work through – a relatively easy stock to ride out the storm with). How confident are you really in the forward earnings view of these companies — even if the US moves into recession? What type of earnings “moat” do they really have? What is their 2-3 year forward valuation — based upon your analysis of various economic scenarios?

Appreciate your views here — as all of these stocks look like momentum plays — particularly GEOS which is down almost 7% today (as traders start to take profits). Thanks a lot.

Igor Greenwald

Igor Greenwald

Hi Stephen,

If the economy rolls over, most energy stocks and indeed most stocks would be at risk. Would some of our recent picks suffer more than ExxonMobil in that scenario? Absolutely. Could the economy be slowing as we speak? Of course. But a recession soon isn’t our baseline scenario, and I guess I missed the memo about this being the “later stages” of the bull maket. But if you do believe that, then absolutely these probably aren’t the stocks for you. They do have a lot of momentum, and as such are subject to a pullback at any time. But we obviously believe in the fundamentals and the prospects, as laid out in the articles about those companies.

Stephen Reiser

Stephen Reiser

Hi Igor,

Firstly, thanks very much for your message. I would clarify a couple of points though — technically we are indeed in the later stages of a cyclical bull market for stocks, based upon everything we can tell. Here is why — My recollection is that a bull market advance typically runs approximately 36-39 months. We are now closer to 48 months (one of the longest runs in history; but not the longest). The issue right now is also that half of the OECD countries have already started to show negative GDP growth. Further, S&P corporate profits are normally well above their 6% long-term average (about 2 standard deviations above) and tend to be mean reverting, etc. 40% of S&P profits are tied to Europe (and how is Europe looking these days). Also you do not need a recession for stocks to pull back dramatically as we saw in the 1970s for example. Market psychology simply changed.

The only way to beat this type of scenario is if the global economy is truly healing. Otherwise, we as subscribers simply need to carefully look at the downside risks — as well as the upside. This why we are asking.

Bottom line: You and Rob have chosen some potentially GREAT stocks here (CBI clearly being a very exciting pick). Further, you did a great job getting out of BTU and related coal stocks. My only point is that we are really going to need to see accelerating earnings for CBI, COG, GEOS — to defy some potentially quite significant downside pull in the market. If you are seeing that type of accelerating earnings growth prospectively, then we are good. So the point is not whether the stocks are right for me (or any of the other subscribers) — simply that you and Rob are fairly sure that these companies can show accelerating earnings growth over the next few years – against a variety of market scenarios.

Thanks a lot, and keep these very interesting ideas coming. Very much appreciate the pain staking research you and Rob went through and hope that you do not mind us asking some slightly tougher questions about the stocks and your thesis. The market can be unforgiving; just want to get these choices right.

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